NDS Group Q4 2006 Earnings Conference Call Transcript (NNDS)

NDS Group PLC (NNDS)
Q4 2006 Earnings Conference Call
August 8, 2006 11:00 am ET

Executives

Abe Peled - Chairman and Chief Executive Officer
Alex Gersh - Chief Financial Officer

Analysts

Ari Bensinger - Standard & Poor’s
Tim Boddy - Goldman Sachs
Daniel Meron - RBC
Mehrdad Torbati - Deutsche Bank
Jason Mauricio - Arete
Todd Mitchell - Kaufman Brothers
Alan Gould - Bleichroeder
Roni Biron - Oscar Gruss
Conrad Verner[ph] - Morgan Stanley
Gordon Tomasin [ph], Aco Capital [ph]
Paul Davis [ph], New Media Markets

Presentation

Operator

Welcome to the NDS Fourth Quarter and Annual 2006 Results Conference Call. At this time all participants are on a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I must advise you all; this conference is being recorded today, Tuesday the 8th of August 2006.

On this call we will make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's views and assumptions regarding future events and business performance as of the time the statements are made. Actual results may differ materially from these expectations due to changes in global, economic, business, competitive market and regulatory factors.

More detailed information about these and other factors that could affect future results is contained in our filings within the Securities and Exchange Commission. The forward-looking statements included in this call are made only as of the date of this call and we do not have any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances except as required by law.

I would now like to hand the conference over to your speaker today, Dr. Abe Peled, Chairman and CEO of NDS. Please go ahead.

Abe Peled - Chairman and Chief Executive Officer

Thank you, everyone, for joining our Q4 and annual conference call. It had been a good year for NDS in which we have seen really excellent take-up of our new technologies, DVR technologies and our middleware, which is now in over 41 million set-top boxes and increasing at a really good pace. And in particular, DVR technology which we are now in over 3.5 million set-top boxes. I might add that with the customers that we have for DVR technology we have access to over 46 million homes, so this is only the beginning.

We're also very pleased in this period to have seen the shipment of the first HD, both HD, PVR and BSkyB based on our XTV technology as well as the regular HD box in SKY Italia, both of which have enjoyed a really good take-up -- really confirming our view that high-definition will be not only a major driver for set-top box replacement as well as growth in subscribers in the United States, but also in Europe.

The authorized base has reached 65 million and we have seen in this quarter some lower net additions due to adjustments in the database of some of our customers towards year-end. But the gross additions have continued to do well and we're seeing good growth on all platforms including at this point we have the largest deployed platform in China in Shenzhen with over 1 million set-top boxes and we're seeing continuing good development of the demand in some of the other Provinces in China where we are already -- have won the business.

We also have seen some really good interactive applications launched. We're particularly excited with the interactive sport and betting application on SKY Italia that has launched with the World Cup games and will become a permanent fixture with the regular season football games on [indiscernible] where they will also be able to be promoted. They interface to the local bookmakers in Italy.

We've also seen a number of new applications launched as a result of our new NT Media acquisition last year including tournament games, backgammon on Ladbroke which is the first time that NDS really has developed the basis for both multiplayer games as well as tournament games. And we expect to see additional such games in the future with some of our other customers. We also had a very good take-up of our games platform, gaming platform as a result of NT Media acquisition was four new customers signed up. In addition, Cartoon Network has launched a whole news series of interactive games using the company’s Visigames.

Interactive advertising is an area that will change dramatically as a result of the capabilities that are offered and will increase even further as the hybrid set-top boxes will be introduced. We're pleased to see that [indiscernible] has become our first customer to use our [indiscernible] interactive ad platform that allows agencies to develop rapidly campaign, it's reducing the time for testing and so forth.

As you know our focus on new platforms has been in Eastern Europe and in Asia and we're very pleased to have launched in Romania. We see good demand in Serbia where we also have a portfolio; we see good demand from Eastern Europe and Russia where some of the platforms have already launched. And as I said, in Asia with the now launch of Tata Sky, which has been slightly delayed due to various licensing issues, now expects now launching. Commercially we feel that Tata Sky clearly has the potential of becoming a big platform and it uses [indiscernible] technology both middleware, [indiscernible] conditional access, games and we expect to see additional new technologies introduced there as well.

I think our progress on IPTV as a stand-alone system has been very good this year and the announcement and launches with Telekom Austria, another major telecom in Europe, and SES AMERICOM which we have announced, Sistema in Russia, the continued growth of Yahoo! broadband platform -- it positions NDS really quite well as a company that has working solutions.

We've also announced a middleware solution for IPTV systems that is suitable not only for stand-alone IPTV systems but is also particularly suitable for hybrid systems, systems in which you know you have broadcaster reception on the one side, better satellite, cable and telcos and broadband as a technology that can complement and augment the broadcast for popular programs providing a really cost effective solution. The first development thought has been completed for YES in Israel where they're really waiting for regulatory approval to launch the broadband service through hybrid set-top boxes that are already deployed.

Of course our win in Germany with Premiere is also for such hybrid set-top boxes. We expect many of our other customers to rapidly move towards such hybrid boxes in order to deal with the competitive situation arising from cable and telcos.

So all in all we feel that we've made great progress in these main areas. As the world of broadband expands and we see our customers moving from simply being a provider -- your satellite provider, or your cable provider, we expect them to be the entertainment provider and deliver that over various distribution means whether they're broadband or mobile or [indiscernible]. And then we have to -- developing the technologies to enable them to do that.

And at IDC we will be showing a whole host of new technologies that really put together some of the announcements that we've had over the last year, whether they are solutions for content protection for mobile, content protection for broadband, for both IT set-top boxes as well as PCs. And the ability to manage that whole relationship for the customer, so that there really is a service that the customer provides that it sees from their pay TV operator. And then the [indiscernible] in world not only in the content protection, but also in the service protection.

We see continuing good take-up on our SVP alliance and are working with 30 plus members and some of the first SVP chips will be coming out -- enabled chips will be coming out next year. So I think we're really pleased not only with our performance for the past year, but we see continued strong performance in the following year and I'd like to turn it over to Alex Gersh, our Chief Financial Officer, who will take you a bit more through the numbers as well as we will provide guidance for our next year. Alex?

Alex Gersh - Chief Financial Officer

Thank you, Abe. Good morning, everybody. Good afternoon. By now you've probably seen our press release; I'll do quickly the highlights and then go through some of the detail as Abe suggested. I'll also address particular variations between Q3 and Q4 in terms of our expenses. They have increased and I'm going to talk about some of the items that accounted for that increase.

Total revenue for fiscal '06 is $600 million, an increase of 8% over fiscal '05 or $556 million; operating income $131 million, an increase of 42% over fiscal 2004. Again underscores NDS' philosophy of driving higher margin revenues while continuing focusing on efficiencies in our business. Operating income margin is up 21.8% versus 16.6% in '05 and net income for the year is $101 million, a 36% improvement over previous year. Diluted earnings per share $1.74 versus $1.29 in '05 and on the basic earnings per share basis $1.80 versus $1.35 in '05.

Now some details perhaps on the revenue. Let's start with conditional access. Revenues have increased by 3% to $351 million. The increase is really accounted by a higher security fee as a result of the greater number of authorized cards in the service. As Abe said, 65 million versus 56.7 million last year with 86% of these cards paying us a monthly fee. This increase was partially offset by the lower number of smart cards we've shipped during the year, 24.4 million versus 30.8 million last year. I will remind everybody that last year we had changeover from SKY Italia -- a SKY Italia changeover, that accounted for additional cards being shipped and so that accounts for a large portion of the additional chips that's been shipped.

Integration development and support revenue decreased by 11% to $46.9 million. Again, that is really due to SKY Italia. SKY Italia migration last year was recognized in integration and development revenue. This year we've recognized just the normal ongoing operations; we didn't have any major implementations. Tata Sky, as Abe had mentioned, we did not recognize any revenue last year as they've launched now this year. And we will recognize the integration revenue in the first quarter of our fiscal 2007.

Licensees and royalties increased by 24% to 88.7 million. Again, that underscores the driver of higher margin software revenue. Of course as Abe said, we've deployed 21.2 million set-top boxes with our middleware versus 2 million in fiscal 2005. However, in 2005 we recognized additional revenue on SKY Italia migration -- additional royalty revenue on SKY Italia migration. So the increase was somewhat offset by the 2005 SKY Italia migration revenue. As of -- and again, as Abe said, we have now as of June 41.6 million set-top boxes containing NDS middleware that's been shipped.

New technologies, again another driver as Abe had mentioned, 24% for 2006 to 106 million. Revenue does include our advanced DVR deployment. The revenue there consists of both licensing and development work that we have done on the DVR deployment as well as CineMedia and, again, Abe has mentioned some of the customers. In terms of the actual set-top DVRs that we've shipped, 2.1 million DVRs were shipped in the fiscal 2006 versus 1 million in fiscal 2005. And as of June, as Abe said, we estimate 3.5 million DVR enabled set-top boxes have been shipped.

One thing that our revenue is affected as are expenses. And I'll talk about it kind of two sections as, of course, and a fluctuation in the currency rate. About 47% of our revenue is euro and pound denominated. Due to the strength of the US dollar, we estimate that our fiscal 2006 -- or our revenue was adversely affected by about 5% based on the foreign exchange changes. Gross margin at 60% versus 61% in 2005 again we've mentioned it previously on a number of quarterly calls that many of our technical staff are now working on specific projects related to specific revenue from specific customers and their accounted for as part of cost of sales rather than R&D. We have also, as part of our acquisition of NT Media, we have -- they've delivered casino games that they were committed to deliver to NDS. As part of that we have an obligation to pay an additional amount for additional royalties for those games so we have accrued that in the fiscal year.

Operating expenses decreased by 8% to $227 million. Again $&D decreases for exactly the same reason I've just talked about in terms of the cost of sales increase. However, we have increased the number of people in the organization. So the decrease, due to the fact that more of our people are working on specific projects, was offset by some increase in headcount. Sales and marketing expenses increased by about 19%. Again, Abe has mentioned our focus on Eastern Europe and Asia. We have increased our marketing spend in those areas.

G&A decreased slightly by 2% to $42.5 million. Basically a larger portion of our -- as we've increased our [indiscernible] a larger portion of our facilities and infrastructure costs are now charged to either R&D to an operation and we have lower legal fees for the full year and a lower stock-based compensation for the full year. The Company headcount increased by 481 employees from June '05. And so obviously that drives the overall increase in all the lines as well as we've added some new facilities in India, in the US and in the UK and that drives some increase in the overall facilities.

In terms of the foreign exchange again, approximately 48% of our expenses is pound and euro denominated. And again, due to the strength of the US dollar we had a positive impact of about 6% on our expenses as a result of that.

Income tax effective rate is 30.9%; it was 27% in 2005. Really there has been some higher effective tax rates in some of our UK operations. Net income $101 million as I talked about before. From the cash flow -- let me just stop for a minute and make some comments on the Q3 versus Q4 expenses. I've mentioned the particular royalty with regard to our NT Media acquisition, that accounted for some of the increases, but that's obviously a one-off item. There's also been some both one-off and ongoing things that should probably be noted in terms of when you compare Q3 operating expenses to Q4. One is the full impact of our headcount increases.

In Q3 we've hired 182 people; obviously in Q4 we had a full impact of those 182 people. Plus in Q4 we've hired another 82 people so there's been a partial impact of those for Q4. There's been some one-off personnel related cost really related to bonuses accrued during the year as we've performed -- over performed on our original target as well as some additional adjustment to the stock option expense.

We've also incurred some non-recurring engineering costs in Q4 related to the new chip developments. We're investing money now in development of generation of obviously new chips that will allow us to increase the functionality of the chip without actually increasing the size of the chip. Which means of course we'll continue to make sure that the cost of the chip remains competitive. We've also adjusted our legal costs for Q4 somewhat based on obviously some accrued expenses that we've incurred. So those are the things that -- many of them are one-off that have affected the Q4 versus Q3 operating expense.

Now let me get back to kind of the year overview. On the cash flow we've got cash - and short-term investments of $505 million. I will just remind everyone -- as of June 30th I will remind everyone that our short-term investments are really just bank deposits with maturity of over three months; generally for us it's six months which under U.S. GAAP need to be classified as short-term investments.

Cash from operating activities just reflected higher receipt from customers, lower payments for smart card and taxes and offset by obviously higher expenses that I've talked about. During the year we spent about $30 million on capital expenditure, a portion of this has been spent, as I said, on the new facilities in India, US and the UK. In terms of the stock options, our employees during the year have exercised 1.55 million shares of their stock options and the proceeds of $29.6 million are shown on the cash flow. As of June 30, 2006 we have 3.7 million shares of stock options outstanding with 2.2 million vested as of June 30th.

I am now going to spend a little bit of time on the guidance and talk a little bit about our guidance for 2007. Before that though, I think it's worth noting that 2006, and we have mentioned it before, had been affected by some one-off significant events. The most significant two events are obviously recognition of revenue on some legacy DirecTV boxes where we downloaded middleware last year in 2005, but recognized revenue in 2006 fiscal year as well as the multiyear R&D tax credit from the French government. Those two effects allowed us to substantially improve our operating margin and have a 21.8% operating margin for the year.

We do not anticipate any of those types of events occurring in 2007 -- at least for now. So that said, the guidance for 2007 is -- the revenue range is between 660 and $680 million. The operating income range is between $150 million and $160 million. That translates to operating margin range between 22.7 and 23.5%, still an improvement on the 21.8% this year. In 2007 we expect to spend approximately $25 million in capital expenditures and a portion of it will be spent on some new facilities in the UK and India as we continue to grow. That's really all I have to say. Thank you very much.

Abe Peled - Chairman and Chief Executive Officer

Thank you, Alex, and we would like now to open it up for questions.

Question-and-Answer-Session

Operator

[Operator Instructions]. Ari Bensinger.

Ari Bensinger - Standard & Poor’s

You talked about specifically for Q4 lower smart card shipments due to a customer database adjustment. If you could just expand on that. And then maybe for fiscal year '07 sort of give a run rate that's reasonable looking forward.

Abe Peled

I didn't say lower shipments, I said somewhat lower net additions to the installed base was due to certain customer database adjustments rather than actual gross additions -- which happens every once in a while. In terms of the run rate, I really can't comment in detail on the run rate. But I think that we expect to see our highest smart card shipment next year in terms of normal for a year, taking out the onetime event of 2.5 million cards that we had for SKY Italia. And I think if you look at our revenue and operating profit guidance, and clearly we expect to see a good year.

Ari Bensinger - Standard & Poor’s

Okay. And then for operating margin, you've mentioned before sort of a long-term target of 25%. Obviously there's been some hiring and I guess that's sort of lowered that target a little bit, at least for next year. Are you ramping up for some new type of revenue growth initiatives? Because the hiring seems to be a little bit out of whack, at least with the revenue growth that you've shown so far. And I'm just wondering if there's anything in the future that sort of supports this type of aggressive hiring?

Abe Peled

I just want to make sure that you understand that our target reach -- 25% operating margin is being stated as being three to four years away. And I think that increasing our -- and we exceeded our previous target by reaching 20% considerably earlier than we had on our original statement, some of it due to onetime. And I think if you look at our operating margin that we see for next year, it's definitely continuing to improve and [indiscernible] I think making real good linear progress towards the 25% in the time frame that I've indicated. I think our hiring clearly has to be in advance of the demands -- the continued strong demands that we see from our customers as well as some of the new initiatives that we are undertaking. And we believe that our hiring is in line with achieving the performance that we have indicated a getting to 25% within three to four years that is by fiscal 2010.

Ari Bensinger - Standard & Poor’s

Thank you. And then just last question, a revenue growth forecast in the low teens in terms of percentage growth is great. I'd appreciate any color maybe per segment if you could just run through if you expect growth for each segment or certain segments or obviously like new technologies are going to show greater growth? Thank you.

Abe Peled

First of all, you know, we don't break out individual pieces. We've said before that we expect new technologies to grow faster than the rest of the business, in general software revenues to grow faster which is partly how we can improve our margin. I also think that we've always said that we believe our business can deliver 10 to 15% revenue growth and 20 to 25% operating growth on a multiyear average and we continue to stand by it is seeing the demand that we see in all the parts of the business.

Ari Bensinger - Standard & Poor’s

Okay, Thanks.

Operator

Tim Boddy, Goldman Sachs.

Tim Boddy - Goldman Sachs

Thanks very much. A couple of slightly different questions. First of all, there's obviously been a lot of speculation recently which I know you can't comment on regarding a potential for some consolidation in the satellite industry in the U.S. Really my question is operationally, assuming that such a thing was to take place what would be the impact on India? Could you the meet the potential need to support there [indiscernible] as well as direct TV subscribers, what sort of change would we need to see in your business? And then a completely different question just in terms of obviously the difficulties in the Middle East, does that have any ramifications on your business? Thank you.

Abe Peled

I think the first question -- obviously I can't comment, but if we're dealing with hypothetically, not only can we, we would be pleased to meet the increased demand from another major platform. In terms of a Middle East situation our facilities are located in -- principally in Jerusalem. We have a very small group in [indiscernible] of about 15 people. They have been relocated and are working out of the Jerusalem lab. In terms of reserve call up, a very small percentage of our people have been called up for reserve duty, less than 10% -- considerably less than 10% and we don't expect to see any real impact on our business considering the fact that less than 10% of the people in Israel and clearly less than a much bigger number, less than 3% of our people worldwide. And therefore we don't see any impact, there's no travel restriction or anything like that for our employees. And in Israel we are normally organized for people to go on reserve duty anyway. So at this point we don't see anything. Obviously if this continues and escalates rather than -- and stops then that may change, but at the moment we don't see any difficulties.

Tim Boddy - Goldman Sachs

Okay, thanks very much.

Operator

Daniel Meron, RBC.

Daniel Meron - RBC

Hi, Abe and Alex. A question on the guidance that you provided on the revenue side. Does that include or assume any changeover? When do you think that the major changeover from customers like Big Sky B, DirecTV, etc., is going to impact your numbers? Thank you.

Abe Peled

The revenue that we provided does not include any changeover in the current assumption. As you can tell from our results, we have currently about 130 million of deferred revenue that will start showing up as a changeover. We cannot comment on when changeovers start. On the other hand, if a changeover will start in fiscal '07. Then clearly it has an upside on both the revenue and operating income. And given that we can change -- start such a changeover with a notice of less than four or five months it may still occur or start in '07, but it's not in the numbers.

Daniel Meron - RBC

Okay, thank you, Abe. And then on Tata Sky you mentioned that there were some delays there. When do you think -- I believe that you guys were doing some work there. Did this impact -- or the expenses that you incurred this quarter, was that part of the onetime change as compared to previous quarters? Did you incur any costs ahead of the project or other similar projects?

Alex Gersh

No, there are no onetime costs. I mean, obviously our engineers and our technical staff have been working on the projects, we've incurred those costs, but we consider those to be continuous costs, we don't capitalize those costs. There are no onetime events that have been incurred.

Abe Peled

…that we didn't recognize integration revenue in this fiscal quarter which it was originally planned. And the delays, they were not technical, they were associated with getting the broadcast license for certain channels that are being -- that are on the platform.

Daniel Meron - RBC

So just to make it clear, you basically -- if we were to -- obviously you had the costs associated with Tata Sky incurred already but you didn't see the revenue which is what I was alluding to. So basically we should see those revenues in the next several quarters. When do you think these revenues from Tata Sky will be finally recognized? Do you think it's a quarter event or even December?

Alex Gersh

As I said, the integration revenue we expect to recognize in the first quarter of 2007. And then obviously you've got the ongoing development as well as smart card shipments and all that, and that will be recognized as developments occur and our shipments occur.

Daniel Meron - RBC

Okay, great. Thank you, Alex and Abe. I'll phone up with other questions later. Thank you.

Operator

Mehrdad Torbati, Deutsche Bank.

Mehrdad Torbati - Deutsche Bank

I have a question regarding fourth-quarter onetime impact which relates to your basically bonuses at the end of the year. Have you been accruing optimistically what you have to pay in June in terms of performance bonus at the end of the year? Were you surprised and what was the adjustment -- what was the adjustment surprise at the end of the year in terms of this element of the business? And as far as your guidance is concerned, what do you see -- stock option expensing you're assuming for fiscal '07 that you expect to incur? And in terms of hiring, same time last year you announced that you'll be hiring 250 employees, you added almost 500 employees by the end of the year. What are your plans in terms of hiring going forward? Do you have the same requirements in terms of -- what should we expect in terms of underlying cost growth if you look at SG&A and cost of operations? I mean, have been growing 17% in fiscal '06. Does your guidance assume such growth in fiscal '07, meaning you're suggesting your gross profit margin should be growing 200 or 300 basis points?

Abe Peled

First of all, let me just comment on the bonus. We didn't accrue optimistically, we simply decided that given the really good performance and the very hard work that our employees have put in this year to increase the bonus for people that deserve it and that resulted in an additional onetime expense. That's the whole point of bonus, that when we can afford to and people deserve it we give it. In terms of the stock options, I'll let maybe Alex comment on that.

Alex Gersh

Actually, it's a good point, I should have mentioned on my own. This guidance assumes no expense for stock options that could possibly be granted in 2007. Now in terms of the impact of that, if you look at our previous grant, the full-year P&L effect of a grant that we did last year was about $7 million. Of course, if it's done in January it's half a year, so that's what I can say about the grant. But this guidance that I've talked about assumes no -- does not assume a 2007 grant. And so that would be an additional expense that is not in the guidance. That's right. And obviously the currency fluctuations going forward, as I've -- we assume basically kind of current rates staying until -- through the year.

Mehrdad Torbati - Deutsche Bank

And in terms of hiring and…

Abe Peled

Let me just address the hiring. So that is true at this -- well actually in May when we gave the guidance for last year we were planning to hire 220 people. But as the demands of the project and the support that we needed to provide for our customers, the development that we feel we need to do going forward resulted in a bigger number which we will do if we see really good opportunities and we can deliver the performance that we feel is in line with the performance that we have given as an indication for long-term for the Company, because we do look at the long-term. And our plans for next year are to hire on the order of 250 to 300 people. Again, if some of the opportunities don't materialize we may hire less, if we see some new opportunities we may hire more, again, consistent with achieving the kind of performance that we expect, including an improvement in our operating margin of, as Alex indicated, anywhere from 1 percentage to 1.5 percentage points -- so going to 23 to 23.5% operating margin.

Mehrdad Torbati - Deutsche Bank

And just a last question on the currency just to make sure I understood correctly. You said that you had a positive impact of how much on your operating expenses of 6% or --?

Alex Gersh

I didn't say operating expenses, I said all expenses. So if you take the total expenses, the positive impact of 6%, if you take the total revenue the negative impact was 5%.

Mehrdad Torbati - Deutsche Bank

On revenue it was negative 5%, on expenses positive 6%? And for your guidance you are taking your today's spot rate?

Abe Peled

Not today, ended.

Mehrdad Torbati - Deutsche Bank

Okay. And then just going back to the question as I stated earlier, do you assume gross profit margin improvement in 2007, fiscal '07?

Abe Peled

That's what I just said, I said -- oh, gross profit. Well, we don't look at -- the partition between gross profit and operating profit, it's really hard to distinguish between the two because it depends on how many people we have to work on customer specific projects. So we encourage people to look at the operating profit line which is a more predictable number rather than the gross profit line.

Mehrdad Torbati - Deutsche Bank

Last question if I may. You mentioned earlier that you have penetrated almost 8% of potential homes you're accessing where you can deploy DVR, digital video recorder. You have now 3.5 million downloads. Where do you see this number to be 12 months down the road when we speak in one year time again on this issue? Will it double or will it triple? How will your penetration evolve based on the current homes you are exposed to?

Abe Peled

I would hope that it will at least double, but perhaps even be bigger than that because we can see an acceleration in the deployment of DVR. And I think if you just look at the example [indiscernible], you can see a continuing growth in DVR and they've also said, for example, that they have a demand for the HD DVR of 90,000. So I would say at least double but perhaps considerably more than double.

Mehrdad Torbati - Deutsche Bank

Okay, thank you very much.

Operator

Jason Mauricio, Arete.

Jason Mauricio - Arete

A couple quick questions. Revenues came in slightly below what you were talking about last quarter. You mentioned currencies, you mentioned the Tata Sky delay, but were there any impacts to your sales from set-top box delays at a few of your big customers?

Abe Peled

No, I think that on our last quarter call I've already said that we expect revenue to come in at the low end of our range, and I don't think that that -- so therefore we weren't counting on anything else. Tata Sky is clearly held to the other side, but not delays in terms of set-top box projects.

Jason Mauricio - Arete

Okay. Given the high percent of R&D that was customer specific and booked in cost of goods sold, is there any trend that you're seeing that that might reverse back into a normal R&D booking or is that something that might stay in cost of goods sold throughout the year? I know you alluded to it on the last question, but is there any shift that we might see in operating expenses going forward?

Abe Peled

No, I don't think so. I think next year we may actually see a slight increase in that because, given the very competitive environment that some of our customers find themselves -- they are spending increasingly on recurring engineering to ensure faster integration and [indiscernible] of some of their technologies whether it's DVR or broadband or hybrid boxes or so on. So, no, certainly for next year we don't see a decrease, we may see an increase.

Jason Mauricio - Arete

Okay. And finally, over the last few years we've seen several large platforms get upgraded to new higher security cards -- i.e. DirecTV, SKY Italia -- and you've had a catch-up of subscribers coming from converting pirated customers to paying customers. There's no real big platform doing that in '07. You may have some growth from Tata Sky on the subscriber side. So should we really look at '07 as a replacement business, i.e. what customers can get PVRs, high-definition to maybe drive increase in cards per home, etc.? We're looking at upgrading the installed base to higher paying services rather than actually seeking out new subscribers?

Abe Peled

No, I don't think so. I think that the major platforms continue to grow. We see continued multiroom penetration both in SKY Italia in BSkyB and some other platforms that are starting that. And in addition you see the trends that you've just mentioned. So no, as I said, we expect the shipment of cards next year to actually be higher and expect to see the addition to the subscriber base also be higher than this year.

Jason Mauricio - Arete

Could Tata Sky start being a card accepting customer in '07 or is it mainly still going to be a sort of systems integration support type customer?

Abe Peled

No, Tata Sky has a very ambitious rollout plan and they've ordered cards and have a smart very aggressive delivery of smart card plans for the year. Yes, I think you will see reasonable substantial additions from Tata Sky (multiple speakers) subscriber base.

Jason Mauricio - Arete

Okay, thank you.

Operator

Todd Mitchell, Kaufman Brothers.

Todd Mitchell - Kaufman Brothers

Good morning. A quick question on margins. If you look out over the last eight quarters there seems to be a seasonal pattern in the margins. First, there seems to be sort of an inverse relationship where you have the highest margins in your lowest revenue quarter. And second, there seems to be sort of a tying up of the year in the fourth quarter. Is that the case? Do you tend to work your business so that at the end of the year there's sort of a -- we've gone through all of the onetime items this year -- where we can sort of expect you to clean up the books at the ends of the year and have lower margins? Can you address that?

Alex Gersh

No, not at all. I mean, every one of those examples, whether it's additional download revenues where as the costs that we've discussed here have no seasonality to it. If there is some trend in those eight quarters it's completely on -- it's unintentional. So there's absolutely no pattern here and nothing that we try to do and no cleaning out of books type of activity at all.

Todd Mitchell - Kaufman Brothers

Okay. And then one other question. Can you give me customer concentrations?

Alex Gersh

In terms of…

Todd Mitchell - Kaufman Brothers

I'm assuming you're going to be floating customers that are a percentage of revenues. Who were the large ones and what was their percentages this year versus last year?

Alex Gersh

What you'll see in our 10-K when it's filed in early September, you'll see the revenue from our largest customers are shown. You'll see also the revenue from the related parties -- Newscore related affiliated parties disclosed. I can tell you that out of the 600 million the Newscore related entities account for a full $458 million of revenue.

Todd Mitchell - Kaufman Brothers

And is that up versus last year and was there concentration within the specific platforms?

Alex Gersh

You will see -- again, we will disclose the three largest platforms being DirecTV, BSkyB and SKY Italia, they continue to be the three largest platforms. So there's no change there. Last year's revenue from all of the related parties was $412 million.

Todd Mitchell - Kaufman Brothers

Okay, thank you very much.

Operator

Alan Gould, Bleichroeder.

Alan Gould - Bleichroeder

I've got a few questions. First, how much was the SKY Italia integration revenue last year and should the Tata Sky integration revenue in the first quarter of fiscal '07 be similar? Second, can you update us a little bit on DirecTV's HD DVR? I believe it was a Thomson box that was supposed to ship in the summer. And when is your box supposed to ship? Is that for Christmas time? And then third, Alex, could you give us some idea where you think the tax rate is going to fall in fiscal '07?

Alex Gersh

The sky Italian integration revenue was low double-digits last year.

Alan Gould - Bleichroeder

And should Tata Sky be similar?

Alex Gersh

It will be around the same type of numbers.

Abe Peled

On the DirecTV HD DVR, we can't comment beyond what DirecTV comments on it. So I think [indiscernible] their conference call today.

Alex Gersh

And on the tax rate, as I said, we continue to talk about a 30% overall tax rate. As I said, as we expand the jurisdictions we operate it obviously fluctuates a bit more based on these non UK jurisdictions, but we still expect and look at the 30% tax rate going forward.

Alan Gould - Bleichroeder

Okay. And I've got a follow up on one thing, Alex. The NT Media royalty, that 6 point whatever million it was in the fourth quarter, that was a one-off, so we'll go back to the 2 to $3 million quarterly rate for royalties?

Alex Gersh

First of all, let me just go to -- NT Media is not almost 6 million. There are a number of third party royalty companies to whom we pay a third party royalty. A substantial portion of increase from Q3 to Q4 has to do with the NT Media royalty.

Alan Gould - Bleichroeder

Okay, thank you very much.

Operator

Roni Biron, Oscar Gruss.

Roni Biron - Oscar Gruss

Alex, your gross margin on the royalty side was lower this quarter. Any specific reasons for that?

Alex Gersh

You're talking about the third party royalty, that's what we've just talked about. The NT Media is one of the reasons we've -- because they've delivered the games that we expected them to deliver we've accrued an additional royalty for that. There were some additional items, but that's the biggest one.

Roni Biron - Oscar Gruss

And regarding your working capital, inventory turns went down and DSO went up this quarter. What was the reason and should these levels be indicative to the next coming quarters?

Alex Gersh

I'm sorry -- the inventory turn, it went up this quarter, is that what the question is?

Roni Biron - Oscar Gruss

Inventory days it went up.

Alex Gersh

I think, as I said, when we develop new generations of cards and as we get ready to ship to our customers based on their forecast, it is something that could happen on a quarterly basis where we could either build up some inventory or not build up some inventory. There is nothing in the fourth quarter that is any different in terms of that. So that's just in anticipation of the shipments and the orders that we expect from our customers over the first half at least of 2007 when we build up some inventory.

Roni Biron - Oscar Gruss

Okay. Finally, I realize the difficulty in breaking down your outlook into quarters, but can you give us a general idea as to the revenues pattern in the coming year, is it back end loaded or anything that can help us do forecasts?

Alex Gersh

The most we can do is talk about what Abe just talked about as a multi-year averaged, 10 to 15% revenue growth, we still stand by that. As we've said many, many times before -- it's very difficult to forecast on a quarterly basis and we certainly cannot give any more information than that -- and the guidance of course for 2007 which we have now.

Roni Biron - Oscar Gruss

Okay, thank you.

Operator

Conrad Verner [ph], Morgan Stanley.

Conrad Verner[ph] - Morgan Stanley

I think a lot of the stuff I was going to ask has been answered already. But just two things on the guidance. Could you maybe explain what the main deltas are between the 660 and the 680? And what would have to happen for us to maybe do a bit better than the 680 or is that out of the realm of reason? Are we now in a stage where -- I mean, the guidance at the beginning of the year is pretty much meant to be the real picture and not necessarily conservative? And then on the operating income, just a question on this French subsidy. I believe you can apply for it this year -- nowhere within the 150 to 160 though are you assuming that you actually win it. So if you did get the French R&D kind of benefit, that would be on top of the 150 to 160, right?

Alex Gersh

Let me answer the second question first and then Abe will answer the first one. First of all, let me just correct it, it's not a subsidy, it's obviously an R&D credit that the government gives us. The 5 million was a multiyear credit, you're absolutely right, yes, we can apply for it. But even if we do get it will not be anywhere near the 5 million we got last year. So absolutely we'll continue to apply for it and any possible impact of that is already incorporated into our guidance that I've talked about.

Abe Peled

I think that, look, when we give guidance we try to give people our best guess. The range comes from that life is uncertain and things don't always happen when we expect them to happen or may not happen at all. And the answer is yes, it can be higher than the guidance. I gave one particular example should there be the start of a changeover from one of the major customers that would start moving some of the deferred income into revenue and into profit. I don't think you should view the guidance as, oh, we're trying to just come into the very conservative or very aggressive. I think we're trying to give you our best estimate and what is basically our visibility at the moment. And I think for the last seven years that we've been a public company we've generally come in within the guidance that we've given or when we had to adjust it like we did last year or in some other years we adjusted it as our visibility improved, typically upwards.

Conrad Verner[ph] - Morgan Stanley

Okay, thanks a lot.

Operator

Gordon Tomasin [ph], Aco Capital [ph].

Gordon Tomasin [ph], Aco Capital [ph]

Good morning. A couple of questions. First of all, just curious what geographical region you've hired most people, whether it's my side of the Atlantic or over on the other side. And secondly, on the balance sheet, on the cash -- the cash keeps piling up and I was just wondering about your thoughts on what there is to buy and the pricing of the potential targets and likely time horizons?

Abe Peled

I don't know which side of the Atlantic you are to be blunt. But I think we hired a lot of people in the Pacific or Indian Ocean. So -- no, a significant number of the 400 or 500 employees have been hired in our Bangalore facility which now has over 540 employees, up substantially. Although we did increase our facilities in Korea and the United States and the UK and in Israel and some up in France as well. But the majority of them were hired in Bangalore. The use of cash -- was that the second question?

Gordon Tomasin [ph], Aco Capital [ph]

Yes, exactly.

Abe Peled

I think we are continuing to look for acquisition that may help us round out our product range, especially in the areas of hybrid broadband systems and broadband system standalone possibly as well as mobile. We will also, usually before our shareholders' meeting which is on October 30th, our Board also considers whether a dividend will be appropriate and then shortly we'll consider it again in light of our plans and our cash position and so on.

Gordon Tomasin [ph], Aco Capital [ph]

Thank you.

Operator: Todd Chanko, Jupiter Research.

Gordon Tomasin [ph], Aco Capital [ph]

Could you please give us an update of your secure video platform -- secure video processors or SVP initiative?

Abe Peled

I mentioned in my introductory remarks that we now have over 30 people in the alliance. We expect to see the first SVP enabled chips coming out next year. I think in the meantime we're also introducing -- as you know, we are working with some disks that have the SVP on the memory card so it doesn't have to be in the device itself. We'll also be introducing at IDC devices like our USB key that has that functionality so it doesn't have to be in the PC but can be on a USB. And we've always seen as we feel the long-term play for securing the distribution of valuable content in a not only vertical world where it goes and stays in the set-top box but can be distributed to other -- similar devices can be distributed to PCs, mobile devices, on-the-go devices. So I think our progress is good and as expected.

Gordon Tomasin [ph], Aco Capital [ph]

Thank you.

Operator

Paul Davis [ph], New Media Markets.

Paul Davis [ph], New Media Markets

You mentioned the importance or the growing importance of hybrid IPTV boxes and so on. I wonder if you could talk a little bit about how important that is to you as you move into that market. And also I think in the recent past you've talked about Microsoft as being the main competitor you're going to face in that area. I just wonder if you could talk a little bit about the advantages of your products of Synamedia over the Microsoft one with which I understand there are certain issues to do with scalability.

Abe Peled

First of all, I want to make the distinction, on hybrid systems which are really applied to the customers that we already have we don't consider Microsoft a competitor because they don't have such a solution. And I would expect that all our customers in the developed countries for sure that face competition from triple play and so on will be moving toward hybrid set-top boxes and we will see a replacement cycle of regular boxes with hybrid boxes. Some of the new boxes that are being shipped already have that hardware capability of Ethernet 4 or a USB connector that simply was a software download can become hybrid boxes. In terms of standalone IPTV systems, I think the differences between our system and Microsoft are essentially three. One is our system we believe is considerably more secure given that it's based on a hardware secure module, whether it's in the chip or with a smart card. Second, our system works and is scalable. And third, MVS with its recent announcement of middleware and system integration has the ability to put together a complete end-to-end system whereas Microsoft, which is traditionally a product company, will sell an SBK or really a packaged product that then the operators working with system integrators, third parties has the challenge of putting together a new working system. And as we know, these things end up costing a lot of money and time and furthermore don't always work as expected. Whereas NDS can really -- now given our experience there, can take over the system integration role and deliver based on many NDS components but also obviously integrating with third party components whether a video server, [indiscernible] and all of those things. But those are the principal differences.

Paul Davis [ph], New Media Markets

Okay, thank you very much.

Abe Peled

Okay. I'd like you thank everybody for staying with us and we will see you on the next call with our Q1 results. Thank you.

Alex Gersh - Chief Financial Officer

Thank you.

Operator

That does conclude our conference for today. Thank you all for participating. You may now disconnect.

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